Chapter 11: ERP Accounting System

Now that purchasing and selling items are running smoothly for Spindl, these transactions also need to be recorded properly. Ledger entries for everything, what was debited/credited to which account and from which department, etc.

Earlier, they were manually making entries into Tally to keep their books updated. However, this meant that every entry would have to be made over multiple platforms. Duplicate data entry and the lack of automation just ended up becoming a productivity sink.

Thankfully, now that they’ve set an ERP up, integrating data from various sources into the Accounting module is easier than ever.

Why use ERP for accounting?

Accounting is a mandatory process for every business. However, it can be time-consuming and exhausting to keep updated at all times. With an ERP, you can take full advantage of the value of integration. All relevant transactional data from other modules (e.g., HR, sales, purchases, inventory, etc.) will automatically sync with your accounting data. This makes for hassle-free bookkeeping. There’s also a considerably smaller chance of errors. And because all your data’s in one place, you can get incredibly detailed financial reports that go beyond the basics.

Breaking down the workflow

Introduction to setup and accounting

With every module, there exists an initial setup process that involves uploading data, configuring settings, etc. That’s also the case with the accounting module, however, it’s a little bit of an intensive process. You must check all your configuration information twice before moving on. This will influence virtually every transaction you make within the system, so it’s _extremely _necessary you tread with caution here.

You’ll come across quite a lot of in-depth parts while setting accounting up, so let’s brush up on the lingo.

Company Setup

A company is a legal entity made up of an association of people who have come together to carry on a commercial or industrial enterprise. This includes details about the structure, domain, and defaults (e.g., default finance book, letterhead, holiday list, standard working hours, T&C, country, tax ID, various accounts, etc.).

It’s incredibly comprehensive, and for good reason—it ensures that every other part of the accounting module works per this data.

Opening Balance

The opening balance is the balance that is brought forward at the beginning of an accounting period from the end of the last accounting period. If you’re switching your accounting software, the opening balance is the first entry you’ll make. This includes details about your assets and liabilities as we’ve discussed previously.

Cost Center

A cost center is a part of your organization where costs or income can be charged. When multiple cost centers are tagged with appropriate percentages (when various cost centers are dependent on each other), it creates a distributed cost center.

For example, if the Cost Center 'B' and 'C' depend on Cost Center 'A' by 20% and 80%. Then, you can mention 'A' as a Distributed Cost Center. It helps to reflect the income, expense, and budget of 'A' in 'B' and 'C' with allocated percentages.

Fiscal Year

A fiscal year is used to record and report the transactions for the year. Different countries have different standards for fiscal years and taxpaying. Make sure you check your jurisdiction’s ruling before setting this up!

Accounting Period

An accounting period defines a period in which financial statements are recorded. Usually, your business’ accounting period will coincide with your fiscal year. However, unlike the fiscal year, an accounting period can be adjusted to shorter spans as well (e.g., a month, or a financial quarter). Setting an accounting period is useful in preparing a regular financial performance for external stakeholders and internal use as well.

Chart of Accounts

We discussed the Chart of Accounts while talking about Spindl's data migration process, but here’s a quick refresher:

The Chart of Accounts is an umbrella term for the names of the accounts of a company that are required for accounting and bookkeeping. It also is a way of classifying accounting entries (mostly based on statutory, such as tax, compliance laws, etc.). The Balance Sheet, Profit & Loss Statement, Account Heads/Ledgers, and other account types all comprise the Chart of Accounts. The overall structure of your CoA is based on a double-entry accounting system, which is the accepted standard across the world. It’s designed to easily provide you with detailed reports (that you can, in turn, provide to the government and tax authorities!).

It’s essentially the blueprint of the accounts in your organization.

(You’ll be importing this data while setting up your ERP, and it’s also the first step in creating a full-fledged accounting system.) There are different account types, such as balance sheet accounts, profit and loss accounts, and groups and ledger accounts, etc. that are all maintained within this umbrella.

Accounting Entries

A good way to understand how accounting entries function is to think of Newton’s third law of motion: for every action, there is an equal and opposite reaction. Using that logic, each time a transaction of any sort happens within your company, at least two accounts are affected by it.

Let’s look at an example.

If you purchase new machinery for your manufacturing business, your company’s assets go up by the value of the machinery. That’s the first account that’s affected. The equal and opposite entry is that your company’s cash goes down (as it was spent in purchasing the asset).

Maintaining your accounting module revolves around billing and invoicing transactions

Sales Invoice

Sales invoices are bills that you send to your customers for the products and services you provide. This is the driving force behind your company’s income. Having a sales ERP module greatly helps in maintaining sales invoices.

Purchase Invoice

The bills you receive from your Suppliers for a purchase order against which you need to make the payment are called purchase invoices. Although Using the purchase ERP module, you can easily keep track of them.

Journal Entry

The other accounting entries, such as payments, credit, etc. that reflect in the general ledger are all called journal entries. Think of this as a multi-purpose tool to ensure that every transaction gets recorded, regardless of which category it falls under.

Returns and Credit

Managing credit is made simpler through the use of an ERP. You can issue credit notes to a buyer against goods that they have returned to you. It can be less than or equal to the total amount of the initial order.

When allocating credit to a customer, you can set a credit limit. This decides the maximum amount of goods or services they can get without having to pay money upfront. This is generally used for customers who make bigger, more frequent purchases from your business.

Banking

Banking encompasses the transactions you make using your bank account. In an ERP, you can generally use a bank reconciliation tool to match your ERP’s statements with the bank account’s statements or add journal entries.

Saving your company’s bank accounts, supplier and customer bank accounts, etc. lets you record all the bank transactions for accounting accuracy as well.

Managing company shares can be done directly within your ERP system. There are two key elements to this:

Creating shareholders in the system
Logging share transfers

A shareholder is any person, company, or other institution that owns at least one share of your company’s stock. Each shareholder is issued a folio number upon making a transaction. The folio number also acts as a unique identifying number or ID, using which record-keeping against each shareholder’s transactions can be maintained. A shared ledger in the system is used to maintain a report of all transactions made by a shareholder.

A share transfer is the issue, transfer, or purchase of company shares from one party to another. This change in the company’s share structure is logged in your ERP using share transfer entries.

Taxes

Taxes play a large role in how you buy and sell. It’s a complex set of nuances but is necessary and unavoidable. You can avoid having to configure taxes for every transaction by setting tax rules and tax categories. You can use these to apply tax rules to transactions based on various criteria.

You can also set up tax withholding categories for areas where the tax is deducted at source and paid to the government. This is usually called TDS (short for tax deducted at source), where employers subtract the taxes from their employee's paychecks and directly pay the amount to the tax authorities. TDS goes beyond just payroll, however. It can also be applied to transactions made with your suppliers depending on your agreement with them.

Let’s also look at VAT (value-added taxes) and GST (goods and services taxes). Most countries across the world have their versions of VAT, a type of tax that is assessed incrementally based on the price of a product or service at each stage—from production to distribution, all the way to the final consumer.

For item-wise taxation, you can create item tax templates. This is useful if some of your items have different tax rates from the standard tax rate, as it lets you assign modified tax rates to specific items (or a group of items). Then, when transactions are made with these items, the custom tax rate overrides the standard tax rate.

Based on how your tax legislation is, you will have to configure your tax settings in a specific manner. Make sure to weigh in with your business accountants to ensure that no errors are made during this process!

Accounting reports

Every accountant and accounting team member needs some important reports or statements to keep the business finances in place:

General Ledger is a birds-eye view of all your accounting transactions. It’s a detailed report of all the transactions posted to each account. For every transaction, there is a credit and a debit account, which it also includes. Think of it this way: any ‘movement’ of money or any transaction that takes place gets added to General Ledger.
Accounts Receivable and Accounts Payable: To track the outstanding amount of Customers and Suppliers. It also provides an aging analysis i.e. a break-up of the outstanding amount based on the period for which the amount is outstanding.
Trial Balance: A Trial Balance is an accounting report which lists account balances for all your Accounts (“Ledger” and “Group”) for any given reporting period. The general purpose of producing a trial balance is to ensure the entries in a company's bookkeeping system are mathematically correct.
Balance Sheet: A Balance Sheet is the financial statement of a company that states assets, liabilities, and equity at a particular point in time. You can run the report across multiple years to compare values and analyse your financial position
Cash flow statement: Cash Flow is a financial statement that shows the incoming and outgoing of cash or cash-equivalents for a company. It is used to analyse the liquidity position of the company.
Profit and Loss statement: A Profit and Loss Statement is a financial statement that summarizes all the revenues and expenses in a given period.
Sales and Purchase register: The Sales and Purchase Register report shows all the Sales and Purchase transactions for a given period with the invoiced amount and tax details. In this report, each tax has a separate column, so you can easily get the total taxes collected/paid for a period for each tax type, which helps to pay the taxes to the government.

These are brilliant tools in every bookkeeper’s arsenal. It allows you to track your revenue stream, maintain a solid paper trail, have expenditure summaries, consolidate your financial details, pick out monetary trends and patterns, and also create an audit trail should you need it.

Spindl's accounting progress

While there’s no specific ‘workflow’ for how the accounting is managed, all the various components of Spindl's newly-setup accounting module allow the company’s accountants much greater control over their transactions. This is largely due to centralized data across the various departments. The system’s double-entry method lowers the chance of missing or contradictory data entries, due to which they see a significant drop in accounting errors.

Furthermore, the reports garnered from such comprehensive data allow them to keep track of their transactions, cash flow, income, etc. Not only does this help Spindl’s accounting team garner a lot more insight into the business’s strengths and struggles, but it also helps them predict cash flow, forecast revenue, and set a realistic budget for the upcoming accounting period.